Real Estate & Property Law

May A Board Decide To Add A Capital Improvement Without Seeking Owner Approval?

I love it when I get really good meaty questions from readers that, when answered, can help others. This is a good one that works:

FROM A READER: "So here is the question. Can an association randomly just add something to reserves and then build it. Kinda the ?If you build it they will come? mindset. I looked at Davis Stirling and our CC&Rs and found nothing really concrete either way. I have read two articles on this subject by two different attorneys and one said that so long as the new improvement fell within budget it was OK. (Assuming that reserve spending was a budget item). The other article noted that ?The discretionary addition of new facilities which were not previously part of the development?s original construction, which exceeds 5% of the budget, requires membership approval."

This person is asking for my thoughts on the subject. Here goes ...

Some documents do require a Board to seek membership approval for any capital improvement that exceeds 5% of the budgeted gross operating expenses for a year. Not all do. If there is no such requirement, it is still possible that owner approval must be obtained if the improvement is going to cost more than 5% of the budgeted gross operating expenses, and a special assessment for that amount is needed to pay for it.

As for an opinion that it is okay if it is "in the budget" means that if the Board budgetted for it in the operating budget for the coming fiscal year, it would be a valid expenditure without member approval, so long as the regular assessments were not increased to pay for it (or other increases in the aggregate) more than 20% over the year before,

In some cases, Boards make decisions to add a capital improvement if there is enough "fluff" built into the budget to cover the cost. Sometimes Boards use "windfalls" or leftover funds from special assessments that were paid in for some project for capital improvements.

Not all people (board members, managers and attorneys included) are into "full disclosure" to the members, or even a survey before any capital improvements are made. However, I believe that it is important to see where the members stand before spending the money for something new ... especially in these days when HOA budgets are being tested to the max with foreclosures and rising delinquency numbers.

If the Board tends to spend money whenever it is available for unplanned improvements and other things that might be perceived by members as unnecessary, and there are no limits in the governing documents on spending on capital improvements, I would say that should be of concern to the members.

Full post as published by California Condo & HOA Law on September 15, 2008 (boomark / email).